From Cirrus to Schwing America, firms in Minnesota are part of China's growing U.S. investment

Happy days are here again at Schwing America's sprawling plant in White Bear Township. The work force there, which sank below 100 when sales collapsed at the bottom of the recession and the company went through a Chapter 11 bankruptcy, is back above 300. Demand has rebounded for the plant's signature product, concrete pumps used to build projects ranging from the new Vikings stadium in downtown Minneapolis to that new house just down the street to virtually any concrete structure you can think of. "We're seeing growth everywhere nationally," says Schwing America CEO Brian Hazelton. And internationally. The plant exports its pumps to countries on five continents.

Something else about Schwing America: Three years ago, Xuzhou Construction Machinery Group (XCMG), a state-owned heavy equipment manufacturer based in China's wealthiest province, purchased a majority stake — 52 percent — of the company's German-based parent. The change is but one more sign of how China, flush from years of strong economic growth, is finally ratcheting up its investment in the United States.

It's a trend that coincides with ongoing geopolitical tension between the two countries. P. Richard Bohr, a longtime China watcher who retired this spring after directing Asian Studies at the College of St. Benedict and St. John's University, says the complexity of U.S.- China relations has increased enormously as China has risen to the status of an economic superstar. Even as the two nations cooperate more on trade and investment, Bohr notes, new challenges —such as mutual cyber spying, unclear military intentions and the search to accommodate China's global ascent — demand the attention of U.S. policymakers. The back and forth over such matters seems likely to intensify as the 2016 presidential campaign approaches. Meanwhile, Chinese President Xi Jinping will make his first state visit to the United States in September.

A form of state capitalism

Despite continuing one-party rule in China by the Communist Party, the country's economic system left Marxism behind years ago. Today, this system has evolved into a form of state capitalism inextricably linked to the economies of the United States and other advanced Western nations. That is one of the messages of an unusually detailed analysis, released in May, tracking China's rising investment in the U.S. The nonprofit National Committee on U.S.-China Relations and the global research firm Rhodium Group, found that Chinese-owned firms now employ 80,000 full-time workers in the United States. That's a tiny share of all American jobs accounted for by foreign firms. Nonetheless, it's a striking increase from less than 15,000 jobs five years ago.

The study [PDF] came up with first-ever estimates of employment by Chinese companies in each of the nation's 435 congressional districts. Minnesota's Eighth Congressional District, home to 650 workers at Cirrus Aircraft, the largest Chinese-owned employer in the state, ranks 20th. The state's second largest Chinese employer is Virginia-based Smithfield Foods, which operates a large meat processing plant in St. James, Minnesota. Other Chinese-owned companies in Minnesota include Kansas-based AMC Theaters, purchased by China's Dalian Wanda Group for $2.6 billion in 2012. AMC operates several hundred multiscreen movie theaters across the country, including six in the Twin Cities suburbs. Shanghai-based WuXi AppTec employs more than 100 workers at a medical technology firm in Mendota Heights.

Many business leaders and government officials in Minnesota and across the country welcome the stepped-up flow of money from China. "The value of Chinese investment, like all foreign direct investment, is that it adds new capital and ultimately new jobs to our region," says Michael Langley, CEO at Greater MSP, a regional economic development group. Laurence Reszetar, who leads the state's effort to attract foreign investment for the Minnesota Trade Office, echoes Langley's sentiment. "At the end of the day, the fact of the matter is that our economic future and China's are incredibly intertwined," Reszetar says. The stronger the economic ties between the two countries, the lower the odds that political and military tensions between them could ultimately escalate to war, he adds.

The report acknowledges sensitivities to Chinese investment in the U.S. Congress and the national security community. "American officials and the general public remain wary of the impact of investment from China," the study says.

China's economic and political systems differ greatly from the realities in advanced economies. ... Moreover, economic engagement with China over the past two decades has been a mixed experience, often bringing painful adjustment pressures to affected industry clusters and their communities. Job losses related to the outsourcing of manufacturing activity counteracted the benefits of lower cost goods. Many Americans are understandably apprehensive about the impact of Chinese capital investment.

But the report concludes that more Chinese investment in the United States will strengthen America's economy. Shutdowns at U.S. companies acquired by Chinese investors have been rare, the report says, and fears that U.S. firms owned by Chinese investors would import Chinese labor standards weaker than America's norms have not materialized.

Early presence on the Iron Range

In Minnesota, a new chapter in the state's growing engagement with China began playing out on the Iron Range in 2003. Eveleth Taconite, which had been mining iron ore for 40 years, filed a Chapter 11 bankruptcy and shut down its mine in Eveleth. Then China's Laiwu Steel Group and Ohio-based Cleveland Cliffs joined forces to buy the company. Laiwu took a 30 percent stake, Cleveland Cliffs 70 percent. The deal won powerful backing from Democratic Rep. James Oberstar and GOP Gov. Tim Pawlenty. It enabled the plant, whose name became United Taconite, to reopen just before Christmas, allowing 450 workers to return to their jobs. In 2008, Cliffs Natural Resources bought Laiwu's interest in the company.

In many respects, U.S. investment from China is a logical third step for the world's largest developing economy. China built its economic stake in the U.S. largely in two ways: by buying U.S. debt (China and Japan are currently in a virtual tie as America's largest creditors) and by exporting waves of low-cost goods to the United States.

According the new report, China has invested $46 billion in the United States since 2000, most of it in the last five years. These investments take three forms: acquisitions of American U.S. companies, easily the principal form of investment; "greenfield" construction projects; and expansions of existing facilities. Almost half of the 80,000 U.S. jobs are at plants operated by Smithfield, America's largest pork producer/processor. China's WH Group shelled out $4.7 billion to buy Smithfield in 2013. Much of the rest of the investment is concentrated in the New York City, Chicago and San Francisco Bay areas and in North Carolina and Texas. The Waldorf Astoria hotel in Manhattan, which the Anbang Insurance Group purchased last year for $1.95 billion, stands as China's highest-profile U.S. acquisition. In 2005, China-based Lenovo bought IBM's personal computer business; last year, Lenovo acquired the Motorola phone manufacturing operations from Google.

Helping Cirrus rebound

The Committee/Rhodium study describes Duluth-based Cirrus Aircraft as a troubled company that benefited from a large injection of capital after it was acquired in 2011 by a company owned by the Chinese government: China Aviation Industry General Aircraft Co. (CAIGA). Duluth's popular mayor, Don Ness, agrees with that assessment. So do local business leaders.

Cirrus, a personal aircraft manufacturer, is the second largest private employer in the Duluth region other than health-care enterprises. The company, founded in 1984, prospered by developing an innovative single-engine turboprop plane that includes a parachute built into its tail section. Now Cirrus is hoping for federal regulatory approval soon to build a personal jet. The company has said it has more than 500 orders for the new plane. It plans to add at least 150 employees in Duluth to produce the plane. State and local governments are providing subsidies to construct the facility where the plane will be built.

"The recession just hammered Cirrus," says Brian Hanson, CEO at the Area Partnership for Economic Expansion, a Duluth-based economic development nonprofit. "We knew the company was in extremely dire straits. Cirrus made an extraordinary effort to find equity financing during a very challenging economic period. Their people talked to anyone and everyone they could talk to. CAIGA represented their best option for investment."

Courtesy of Cirrus

Renderings of the Cirrus Airframe Parachute System

Initially, not everyone was on board. Rep. Chip Cravaack, then representing Northeastern Minnesota, warned Treasury Secretary Tim Geithner that selling Cirrus to a Chinese company would compromise U.S. security. Geithner headed the Committee on Foreign Investment in the United States (CFIUS), a panel of federal officials that can block foreign investors' acquisitions if they are determined to imperil national security. Cravaack feared the deal could lead the new owners to move Cirrus jobs and sensitive technology to China, aiding the country's military efforts.

Ness says Duluth leaders agreed that CFIUS should take a hard look at the deal. The panel did weigh the proposal, and approved it after a few months. The mayor says the sellers, investors from the Mideast, had no interest in aviation and were solely interested in short-term returns. He notes that the Chinese owners are putting $100 million into the development of the jet. Cirrus employment in Duluth has doubled under the new owners, as demand for its planes has bounced back.

Was there serious concern that Cirrus wouldn't have survived but for its new Chinese owners? "Absolutely," says Ness.

A somewhat similar situation played out at Smithfield. Leaders in both political parties — Democratic Sen. Max Baucus from Montana and GOP Sen. Orrin Hatch in Utah — raised questions about selling the big food processor to a Chinese company. CFIUS considered that deal, too, then cleared it.

Before the Chinese buyers emerged, some Smithfield shareholders had been urging a breakup of the company. That sparked jitters in St. James, where Smithfield is by far the largest employer. St. James Mayor Gary Sturm backed the deal. He says the plant, which had a work force of about 400 when it was sold to the Chinese investors, now employs more than 450 workers. "Everything we've seen so far is optimistic," Sturm says. "They're adding jobs. We're bullish on the company."

At Schwing America, Brian Hazelton says the company is benefiting from the contributions of three countries: engineering, design and production efficiencies, provided by the Germans; financial stability, from the Chinese; and commercial savvy, from the Americans. Hazelton says the Chinese owners have been "very hands-off," leaving the management team of Schwing America entirely to Americans. Germany's founding Schwing family continues to hold a 48 percent stake in the company, which is considering building another plant in the U.S.

Minnesota-China bonds run deep

Minnesota's ties with China have taken a dramatic turn since the country came under Communist leadership in 1949. Dr. Walter Judd, who spent time in China during the 1920s and 1930s as a medical missionary and later represented Minneapolis in Congress, was one of the nation's most outspoken and persistent opponents of the Chinese Communist government. But later, as China opened up to the world, the state's economic and cultural ties with China grew ever-stronger. The University of Minnesota became home to one of the largest contingents of Chinese students in the United States. The school has alumni chapters in China. 3M established the first wholly owned U.S. subsidiary in China and, along with Cargill, H.B. Fuller and other Minnesota companies, opened plants there. Target emerged as one of the nation's largest importers of goods from China.

How rapidly is Chinese investment in the United States, once utterly unimaginable, likely to grow? The Committee/Rhodium report predicts that jobs at Chinese-owned firms in the U.S. will increase to between 200,000 and 400,000 by 2020 from 80,000 now. "These calculations ... are not Pollyannaish," the study concludes, citing the history of Japanese investment in the U.S. "Prior to the 1980s, Japanese companies provided practically no jobs in the U.S. Today, their U.S. affiliates employ almost 700,000 Americans, making them important contributors in many local economies."

China's growing U.S. presence: rising fast but still small

The Midwest accounts for 33,000 of the 80,000 jobs at Chinese-owned companies in the U.S., more than any other region in the country. The 80,000 is up from 15,000 five years ago, but is dwarfed by the 700,000 jobs at Japanese-owned firms in the U.S.

Source: National Committee on U.S-China Relations/Rhodium Group

David Dollar, an economist at the Brookings Institution, says Chinese investment in the U.S. and American investment in China both remain surprisingly small. In China, weak protection of intellectual property and the roping off of many sectors from competition are obstacles. In the United States, Chinese firms seek a less politicized environment and national security reviews "have soured many Chinese investors on the U.S. market." Overall, Dollar says, the barriers are much greater in China. They could fall significantly in both countries if each follows through on its intent to open up the flow in both directions by reaching agreement on a bilateral investment treaty now being discussed.

In Minnesota, state officials created Laurence Reszetar's job last year, in part to reach out to Chinese provincial and municipal governments for more direct investment from China. Reszetar works with federal officials to encourage more Chinese investment. He says the state, which opened a trade office in China a decade ago, needs to do more to leverage Minnesota's deep ties with China to draw more investment from China.

Bohr, a former director of the Minnesota Trade Office, agrees with Reszetar that the economic interdependence of the two countries reduces considerably the threat that they could one day confront each other militarily. Bohr says both nations are engaged in a complicated mix of economic cooperation and competition. The new reality is that a growing part of this stew is that China is not just buying America's debt and exporting to the country, but owning U.S. companies as well.

Comments (2)

continues to grow, funded by the revenue generated by U.S. companies. They now have 3 modern missile-launching submarines and are building the world's largest aircraft carrier. All would be impossible without the generous contributions of the American people.

The analysts who claim that this "relationship" will decrease the likelihood of an American-Chinese military confrontation are short-sighted.

When China has the military means, they will be able to threaten and eventually control other Asian nations in the region such as Taiwan, Vietnam and even Japan and there will be nothing politically, militarily or economically we could do about it to come to the aid of our friends in the region.